Benefits Monthly Minute
This month, the IRS issued Rev. Proc. 2021-30, updating the Employee Plans Compliance Resolution System (EPCRS) in several significant respects, generally effective as of July 16, 2021. As background, EPCRS is the IRS-approved mechanism for correcting plan errors. Under EPCRS, sponsors of qualified retirement plans can correct tax qualification errors under three different programs: self-correction program (SCP), voluntary correction program (VCP), and audit closing agreement program (Audit CAP). Whether an error is categorized as significant or insignificant bears on whether SCP or VCP is available, and also impacts certain correction deadlines. It has been over two years since the IRS has overhauled EPCRS, and the updates are considerable. Below is a brief description of some significant updates under Rev. Proc. 2021-30:
- The new EPCRS permits operational failure correction via a plan amendment that increases a benefit, right or feature even when the increase does not apply to all eligible participants.
- If a plan makes an overpayment of up to $250 (increased from $100) to a participant or beneficiary, the plan sponsor is not required to request return of the overpayment or notify the participant or beneficiary that the overpayment is not eligible for favorable tax treatment. (Note: the $75 maximum amount for de minimis underpayments is unchanged.)
- Defined contribution and defined benefit plans may permit overpayment recipients to repay by lump sum, installment or future payment adjustments. In addition, there are two additional correction methods for defined benefit plans – a funding exception correction method (for single employer defined benefit plans with an AFTAP of at least 100%) and a contribution credit correction method.
- The SCP correction period for significant failures is now extended to the last day of the third plan year following the plan year for which the failure occurred (previously, the correction period was from the last day of the second plan year following the plan year for which the failure occurred). This extended correction period also results in extending the safe harbor correction method for employee elective deferral failures lasting more than three months but not beyond the extended SCP correction period for significant failures.
- Effective January 1, 2022, a new option has been added for plan sponsors to request a no-fee anonymous VCP pre-submission conference under specified circumstances. VCP pre-submission conferences will be held at the discretion of the IRS and the request for a VCP pre-submission conference must be submitted via the Pay.gov website. At the conference, the IRS will provide oral feedback regarding the failure(s) and proposed correction method(s) described in the request. Any discussion of substantive issues at the conference is advisory only, is not binding on the IRS, and cannot be relied upon as a basis for obtaining relief under EPCRS or retroactive relief. After the conference, the IRS will provide a written confirmation that the conference took place.
- Effective January 1, 2022, the anonymous submission procedure which permits submission of a qualified plan, § 403(b) plan, SEP, or SIMPLE IRA plan under VCP without initially identifying the applicable plan, the plan sponsor, or the eligible organization, has been eliminated.
- Effective January 1, 2022, Audit CAP sanctions must be paid through the Pay.gov website (instead of by certified check or cashier’s check).
- The sunset of the safe harbor correction method available for certain employee elective deferral failures (EEDFs) associated with missed elective deferrals for eligible employees who are subject to an automatic contribution feature in a § 401(k) plan or § 403(b) plan is extended by three years (from December 31, 2020), to December 31, 2023.
KMK Comment: Rev. Proc. 2021-30 brings significant changes to qualified plan correction. While the guidance offers plan sponsors considerable leeway in extending the SCP timeframe, offering an anonymous VCP pre-submission conference, and by extending the safe harbor method for correcting certain elective deferral errors, the elimination of the anonymous submission procedure and the requirement to pay Audit CAP sanctions via pay.gov are new restrictions. Overall, we expect the increased flexibility under this new guidance to serve as an added incentive for plan sponsors to correct plan qualification errors and increase compliance.
The KMK Law Employee Benefits & Executive Compensation Group is available to assist with these and other issues.
KMK Employee Benefits and Executive Compensation email updates are intended to bring attention to benefits and executive compensation issues and developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.